Thursday, January 31, 2008

Adam Smith, Radio Shack and Midi Jacks

Peter Kirn of the Create Digital Music Blog reveals the story behind my piece about midi-jacks and Adam Smith yesterday:

“MIDI Jacks, Radio Shack, Economic Theory, and Invisible Hands”

What is the sound of an invisible hand playing a MIDI controller?
Yes, in the latest evidence that the Interwebs really are Douglas Adams’ imagined Infinite Improbability Drive, a conversation from CDM’s humble forums about the economics of Radio Shack and MIDI jacks has led to a blog response from a non-musician defending the true legacy of Adam Smith.

I’m serious. I’m not just, you know, dumbing down CDM and pandering to the economist audience to pick up cute economist girls.

The blogger also feels our forum poster say “dude” too much. Like, whatever. Don’t have a cow, man.

It started with a thread about the ridiculous price of electronics. (Personally, I wouldn’t try to extrapolate any kind of larger economic theory from a chain run as badly as Radio Shack has been under recent management, but our posters did, and I digress) …”.

Read the rest of Peter Kirn’s most excellent article and the comments he received on it, plus his response to them here.

Just goes to show that the effort to defend Adam Smith’s legacy is not falling on deaf ears – there really are people out there whose education includes a fair does of accurate knowledge of what the wrote, which differs quite bit from what the Chicago school taught about him, led by George Stigler.

Did Adam Smith 'Realise' What P. J. O'Rourke Claims He Did?

P. J. O’Rourke is reported (here) to have made a statement about Adam Smith that I am unable to source.

Perhaps a reader may help?

A Daily Show host Jon Stewart recently interviewed P.J. O’Rourke, author of a book about Adam Smith’s The Wealth of Nations. O’Rourke summed up economics in a single sentence for me when he said that “Adam Smith realized that free markets forever vibrate between fear and greed.


what is the source for the reported statement by P. J. O’Rourke that “Adam Smith realized that free markets forever vibrate between fear and greed.”

It is not a statement in Adam Smith's Works that I recognize, but it may be an amalgam of several things Adam Smith said in Wealth Of Nations or it may be a (poor) paraphrase of somethings he wrote, or, possibly, an opinion of P. J. O'Rourke's.

Wednesday, January 30, 2008

Adam Smith On Bargaining to Mediate the Self Interests of the Parties

Vuyo Jack in Business Report 27 Jan (here): writes, “Balancing self-interests of all parties is the key to success”:

In business there are the interests of the different stakeholders to be taken into account: employees, shareholders, the government, suppliers, customers, organised labour and society at large. It is very challenging to find a balance of self-interests among all these stakeholders.

Adam Smith, the de facto father of capitalism, had views on this issue. In Wealth of Nations, he states: "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages."

He argues that the principle of a market driven by an invisible hand is the solution of finding a point where everyone's self-interest can converge.

Finding that tangential point in all the self-interests faced by a company on a day-to-day basis is very difficult.

When it comes to deals, especially black economic empowerment (BEE) deals, a number of interests need to be addressed. Unfortunately, it is not always a transparent process because people veil their self-interests when they go to the negotiating table.

In the most ideal scenarios, all parties to BEE deals would clearly state their motives and preferred outcomes from the transaction in order to find the key points where they are aligned. On those points where they diverge they can then negotiate and have trade-offs. This would enhance the transparency of BEE deals, which would prevent such deals from breaking apart later on.

The bottom line is that the successful economies find a way of balancing the self-interests of the different economic stakeholders in a delicate manner.”

Where exactly in Wealth Of Nations does Adam Smith argue that the principle of a market driven by an invisible hand is the solution of finding a point where everyone's self-interest can converge.’?

Vuyo Jack conflates Adam Smith on the bargaining process in which differing self-interests are mediated by the bargainers (WN I.ii.3 p 25) with a popular 18th-century metaphor that was not about markets at all (it was about risk aversion: WN IV.9.p 456).

He asserts that in an ‘ideal’ situation the parties to a ‘black economic empowerment’ process the participants would reveal ‘their motives and preferred outcomes from the transaction in order to find the key points where they are aligned’.

But ‘Unfortunately, it is not always a transparent process because people veil their self-interests when they go to the negotiating table’.

Too true, but negotiating relationships can be built up over time, particularly in open and free competitive markets, and in the absence of monopoly and state-sponsored coercion, where parties learn to trade for what they want from others by offering others what they want from them.

In other words, Smithian bargaining, which does not need 'transaparency' (self-revealed interests are open to manipulation), and can funtion well enough without concentrating on one's own self interest (Adam Smith's specific admonition!) but focusing on the other party's self interests.

There is a sense here that an outside party is present at these BEE activities and it is hardly free bargaining if they intervene in this manner.

Read and File on Homo economicus

A sharp debate is engages on the efficacy of theories using Homo economicus which is worth reading (and filing)

The case against is put forward here ‘Myth’ versus ‘Fact’: a ‘fiction useful to rightwing economists’ and the case for Homo economicus: ‘he-ain’t-dead-yet!’ here

Read them both and make up your own mind. Useful side-bar reading to Tim Harford’s Logic of Life.

On Midi Jacks and Adam Smith

I’ve no idea what ‘midi jacks’ are or do (something to do with music systems) but the guys (‘dude’ is a popular word here) in the Createdigitalmusic Blog do know (here).

In a lively debate about midi jacks, two contributors enthusiastically disagree (politely) over the choice to repair or buy replacement parts and slip into economics:


Bliss man, I don't mean to start a flame thread about this... I think it's a reasonable discussion to have. But let me give you a piece of advice. Read Adam Smith's "The Wealth of Nations", and think about some of the ideas it contains. There are others from David Ricardo to Friedrich Hayek that are worth reading as well, but Smith is a great place to start. I encourage everyone to read up on the basics of economic theory as it helps to raise the level of these sorts of discussions.

To which “Bliss” replies:

Afro, I am up on Adam Smith. I studied business in college -- although with a focus on the music business. I got this from somewhere on the web over a year ago:

‘Economist Adam Smith in his book 'Wealth of Nations' argued that the invisible hand of the market would guide people to act in the public interest by following their own self-interest, since the only way to make money would be through voluntary exchange, and thus the only way to get the people's money was to give the people what they want. One does not get one's dinner by appealing to the brother-love of the butcher, the farmer or the baker. Rather one appeals to their self interest, and pays them for their labor.’

There's more than a bit of wisdom in that statement. However, there also is more than a bit of implied caution. That if one only appeal to another's self-interest, one's self, i.e., the "brother-love", can be lost in the transaction. "Better to have a full stomach than a full heart." The idea that we can separate ethical and moral considerations from business is a foolish notion, in my opinion

Bliss implies he has not read Adam Smith and states he ‘learned up’ on Adam Smith at a business college. His tutor almost certainly had [NOT] read Adam Smith either.

The myths about the invisible hand are widespread and deep. It has been switched from supporting an argument of Adam Smith about risk-avoiding merchants contemplating the risks of foreign trade into an all purpose guide to individuals in markets.

Like adult spoil sports in the matter of the myth about Santa Claus visiting every single child on the planet with presents each December (physically impossible), tutors in economic classes from the local college course in business to the hallowed lecture halls at the Ivy League top universities, a similar myth is told to young adults by the mass of lecturers, including Nobel prize winners about ‘an’(!) invisible hand, supposedly associated with Adam Smith (he only used the term once in Wealth Of Nations, and his reference was not about markets, ‘guiding’ each and every market participant in the world in trillions of participants.

The real wonder about markets is that there is no central direction; there are no invisible hands, feet, or disembodied parts, guiding anybody. There does not need to be! The relative prices of whatever is exchanged are the only guides needed. It’s called the price system. That's what Adam Smith actually said.

Got it, er, dude?

Tuesday, January 29, 2008

Using Adam Smith as a Smokescreen for Rip-Offs

“Here's what I don't get: The dealers are supposed to be businessmen, go-getters, entrepreneurs. They're supposed to take risks and reap the rewards. They're supposed to want the government to butt out and leave it to Adam Smith. If you believe the hype, these folks embody the can-do, roll-up-your-sleeves, sweat-of-the-brow business ethic that made America an economic superpower. But the reality is they are one of the most pampered and protected groups in the country. And we're all paying for it.”

Angus MacKenzie wrote the above (28 Jan) in “The Trouble with Dealers” in Motor Trend Community (here:

Don’t ya get it Angus? People who are in a complicit pact with lazy academics (who quote rather than bother reading Adam Smith) protect their monopoly profits (‘write your own pay cheque’), by subscribing to the predictable bluff that they should be left alone because Adam Smith said so (he didn’t).

It may be an attributed ‘sweat-of-the-brow business ethic’ in theory but it ain’t nothing more than a rip-off-the-consumer ploy.

How true: ‘the reality is they are one of the most pampered and protected groups in the country. And we're all paying for it’.

Adam Smith favoured competition; he didn’t appreciate what we call ‘rent seekers’ today. The fact is the quotation-happy motor dealers are the gainers. That's why Angus you don't get it. And your family name came from Scotland...

Janet Daley and Tim Worstall Made My Day

Tim Worstall, the should-be-celebrated fount of good sense in Blogland and the mainstream media, writes in The Business a not inapposite piece entitled, “Great Good Sense Here”, on something Janet Daley wrote:

Because The Market, which seems to have a life and a logic of its own, is nothing more nor less than the sum total of all the inclinations and judgments of everyone who has a stake in it. When Margaret Thatcher said you couldn't buck it, what she meant was that once you understood this principle - that a free market was simply the cumulative expression of all human wants and needs - you realised that it could not be made to do what you or anybody else wanted on the basis of some theoretical or ideological imperative.


There is a profound confusion in our post-socialist climate that makes it almost impossible to talk sense on the subject of free market economics. First there is the basic assumption that "capitalism" is an ideology comparable to "socialism". I dislike the word "capitalism" itself because "ism" suggests a planned system. Free markets are just the human condition in economic terms. They are subject to all the vagaries and flaws of incoherence, greed and confusion of individuals acting en masse.” (Janet Daley, The Business, 28 January) (here).

To which Tim Worstall comments (here):

“I would quibble though with the conflation of capitalism and free markets. While we often see them together they are not the same thing at all. Capitalism describes a method of ownership. Free markets describes a method of exchange. Further, while they obviously work well together neither is necessary for the other.
A monopoly can well be capitalist but by the very fact that it is a monopoly it's not acting in a free market.*

A workers' co-operative is not capitalist but can operate in free markets (as John Lewis and the Co-Op shop us).

If I were pushed, if someone were insistent that I choose between the two, having one meaning not having the other, I'd plump for free markets and let the capitalism part go hang. Freedom to exchange as one wishes is to my mind the vastly more important of the two, in both moral and efficiency terms.

* Yes, yes, I know that there are natural monopolies, situations where a free market will move towards the dominance of one firm. But I'm thinking rather of constructed monopolies here, not natural.

What a great statement of what ought to be obvious to all economists but I suspect many will wonder what the difference is because by training, and now by habit, they do conflate modern capitalism with free markets, which is partly because they do not study anything much about the history of political economy since before Adam Smith and specifically since much before the mid-20th century.

Modern economies are about capitalism in all its forms – and there are different forms, such as, the US-British model; the Continental model; the Asian ‘Tiger’ model; the ‘communist state capitalist’ model; and other minor amalgams. There are arrangements called markets with degrees of state intervention, and economists assume that capitalism and markets ‘go together’.

Fair enough, as approximate shorthand for workaday conversations. But if they had some familiarity with Adam Smith’s contribution to moral philosophy and political economy they would notice something straight away – he never mentions the word capitalism, which I have often noted on Lost Legacy (regular readings may groan) was not a word for the economy until after 1854 (Thackeray’s novel, The Newcomes).

Adam Smith referred to the economy as the ‘age of commerce’. This terminology informed Wealth Of Nations, yet modern economists often refer to it as the ‘bible of Capitalism’ and himself as the ‘Prophet of Capitalism’ (plus variations of ‘High Priest of …’; ‘Founder of …’; and, etc.). It is not just a verbal quibble to insist that there is a difference in meaning in these words.

To conflate Wealth Of Nations into a text book about capitalism opens doors to the sorry mess we know dominates dialogue in academe when liberal use is made of selected quotations from Adam Smith, and often just his name, to support policy prescriptions that they consider advisable.

I experience occasional stiff rebuffs from correspondents, some senior and well known in the profession, who respond with ill-concealed irritation at my drawing their attention to their errors of attribution in their published prescriptions to Adam Smith’s authority. One defended himself like an undergraduate by blaming his co-authors who were responsible for that section of the refereed paper, as if his name only applied to the bit he wrote. Often, I have no quarrel with their policy prescriptions, but I do with their trying to enforce their authority in the manner they do.

To read Tim Worstall’s clear separation of the blanket word ‘capitalism’ from ‘free markets’ was a pleasure for me this morning. Would that everyday on the Lost Legacy front started so well as today’s did.

Monday, January 28, 2008

Is Rationality a Fable Agreed Upon?

The Logic Of Life by Tim Harford is reviewed by Michael Sexton (28 January) in the Sydney Morning Herald (here): “Another clinical look at decision-making from the author of The Undercover Economist”.

The great economists, such as Keynes and Adam Smith, were also philosophers who understood that a person's decisions were often influenced by non-financial factors. They would not have been puzzled, for example, by the proliferation of four-wheel-drive vehicles in closely settled urban environments. True, they are more expensive to buy and to run and more difficult to park. But this has to be weighed against the intoxicating image of the fearless hunter and rugged backwoodsman.

Tim Harford, who works for Britain's Financial Times, might, however, be puzzled. The general thesis of his new book is that people generally make rational choices in their lives; that is, they weigh up the costs and benefits of any decision before going ahead.”

I too am reading Tim Harford’s book, of which his comments about Adam Smith not visiting a pin factory, despite his explicit statement that he did in Wealth of Nations, was subjected to scrutiny on Lost Legacy a week or so ago, so I approached Chapter 1 of Tim's with some scepticism.

However, Michael Sexton inn his review touches on nagging doubt about the deployment of rationality in decision making. I can accept that people might make rational decisions on choices as they see them at the time. But I have difficulty with the idea that individuals (except for a very few) make rational choices considering all the circumstances.

The case of people buying 4x4 off-road vehicles for city driving suggests their rationality is limited – it excludes consideration of the urban environment – let alone of the actual need to use them and it may place a higher positive value on the self-worth individuals feel if they drive a 4x4 and others don’t. In short, one person’s rationality may be found lacking in the rational calculus of somebody else.

If two people examine the same choice and come to different conclusions according to their own rationality, then rationality tends to blur into whatever people do is ‘rational’ to them, which seems to weaken the rational point.

However, I shall persevere, bearing in mind a similar use of self-interest as an explanation for most actions.

Now Look at What Adam Smith is Blamed For This Time

Was Adam Smith the intellectual inspiration for the alleged wrongdoings of the French fund trader?

This is implied in today’s Daily Telegraph (here) under the title: ‘Phone records could be key to Kerviel case’ by Peter Allen:

A former colleague revealed that Mr Kerviel, who recently split from a partner, was "more interested in liberal economics than finding a new girlfriend.
The source added: "But you never saw him taking anyone out, and he didn't talk about girls. Recently he spen[t] all his spare time re-reading Adam Smith's Wealth of a Nation, which is his favourite book

Adam Smith's magnum opus, first published in 1776, is the first comprehensive defence of free market, liberal economics - the kind many French blame for making 'Anglo-Saxon' countries like Britain and America over-competitive, too hard working, obsessed with money, and ultimately corrupt and unpleasant to live in.
Yesterday the junior trader was expected to be charged with an array of complex financial offences and brought before a court in the French capital.
If found guilty of charges including computer misuse and forgery he could be facing a 15-year prison term

Wow! Reading Wealth Of Nations drives you to arranging things to increase your own money wealth?

And note: it was his ‘re-reading’ Wealth Of Nations, not just reading it for the first time, that caused some sort of revelatory life-changing epiphany.

I am impressed. Can’t say reading Wealth Of Nations had that effect on me, though it’s early days, I suppose.

Mostly, reading Adam Smith has had the opposite affect on me, especially when leavened with strong doses of Moral Sentiments, and its semi-mocking tone about ‘the poor man’s son [in my case, the poor mother’s son], whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich’ and ‘in the last dregs of life’ he ‘begins at last to find that wealth of greatness are mere trinkets of frivolous utility’ (TMS IV.1.8: p 180).

But then I live in one of the 'Anglo-Saxon' (plus Scotland) countries ‘too hard working’ [according to my family – reading Adam Smith, of course!], [not] obsessed with [the absence of] money and [not] ultimately corrupt and [Scotland is not an] unpleasant to live in.’

Saturday, January 26, 2008

Ronald Findlay and Kevin O'Rourke on Power and Plenty

Ronald Findlay and Kevin H. O’Rourke, 2007, Power and Plenty: trade, war, and the World Economy in the Second Millennium, Princeton University Press, Princeton and Oxford

Part One

I received this book over the seasonal holidays but events at this time and just afterwards conspired to prevent me from making progress with it and I still have some distance to go.

Completing the last read through the editor’s comments on the manuscript for the new book on Adam Smith was not the least distracting event, to which were added lingering duties from my old day job in the matter of grading graduate exams. These duties also affected my Blogging on Lost Legacy, which my regular reader may have noticed from time to time.

Hence, I shall report on my impressions of Power and Plenty from time to time as I complete thematic sub-parts of Power and Plenty.

The first striking impression I must comment upon as someone brought up solely in the Western intellectual tradition is that Power and Plenty is what we describe nowadays as a ‘wake-up call’. There is and always has been a much wider world out there than the nearer, though highly significant, horizons we normally contain ourselves within.

I do not mean to imply that educated people in the West are unaware of the rest of the world – how could we be in the electronic times we live in? I am thinking more of our historical vision than today’s global reality. If our knowledge of history is lit up today, as we go back in time the darkness of ignorance about what was happening outside of Europe gradually closes in the further back in time we go. And even then, with our focus on a narrowing segment of the earth, mere islands of puny light settles on isolated places, themselves surrounded by darkness.

Our memories knew something about the near east from the Bible; we sung about names like Bethlehem as little children; we ran with Moses out of Egypt; and sat in awe of Nebuchadnezzar of Babylon too, and all the rest that remains in a distant locket of memory to name but three places a long way from Britain, on the fringes of The darkness. I remember our schoolboy’s irreverent chant of ‘Shadrach, Meshach, and Abednego; Shake the bed, make the bed, and into Bed we go’. (Apologies to the unsmiling, who were never children…)

Of the rest of the world, we remember next to nothing. Alexander the Great marched through somewhere called Persia; Greeks and Persians fought regularly and with each other; then the Romans fought all round Europe with everybody, including England (but not much of Scotland). Our vision was inward bound; the rest of the history of the world was in darkness. There were some rumblings about a man called Genghis Khan, but not much else. Even Mohammed and Islam did not impinge too much as something we must know about.

Thus, to break the reverie about a too narrow upbringing, I should say that the first three chapters of Power and Plenty came as a bit of a shock. Of course, as an economist, I know more about the rest of the world than I knew as a boy. But what I did not know much about, even after close study of Wealth Of Nations, Lectures On Jurisprudence, and various 18th century books, including Cook’s voyages and the accounts of various other circumnavigators, is the history of the rest of the world long before the Enlightenment got into its stride.

The first chapter organises the thematic structure of book by dividing the world into seven regions, which re-appear regularly in the chapters that follow: Western Europe; Eastern Europe; North Africa and Southwest Asia: the Islamic world; South Asia; South East Asia; Asia (China, Korea, and Japan).

To be blunt: chapter 1 (Introduction) is heavy going, not because it is not written well, but because the reader is led into it without much preparation and is easily ‘lost’ by thestrange names of places and people because of this.

Things get going from Chapter 2 (The World economy at the Turn of the First Millennium) covering the golden age of Islam; China: the Sung economic miracle; The Indian Ocean and South east Asian trade; the Pirenne thesis; Eastern Europe: the Viking connection; the economy of Western Europe.

The thesis of Henry Pirenne (Mohammed and Charlemagne, 1939) will be of immense interest to Adam Smith scholars. Smith advanced the thesis in Lectures On Jurisprudence and Wealth Of Nations that the fall of Rome under the assault of the barbarians (5th century) resulted in a retrograde step from the age of commerce to a fairly basic agriculture (‘a few wretched cattle…’), sometimes known as the Dark Ages (‘banditry and rapine’ ruled the land).

Pirenne puts it differently. The Frankish kings didn’t change much in post-Roman society; but to the south in the Mediterranean the ‘Arab caliphate’ conquered the sea routes between Byzantine and Old Rome in the 7th century, which closed trade between the empires that caused ‘Western Europe to revert to a more primitive self-sufficient economic dynasty’, concluding ‘no Mohammed no Charlemagne’.

Adam Smith was right about the decay of the former Roman western empire, but Pirenne located its cause differently, and opens up a new route of enquiry. To understand his thesis we have to find out more about the rise of Islam, which doesn’t take long to draw us towards the east with which region the Islamic empire did much trade and political business. Before long we are in central Asia, India, back to the Vikings in eastern Europe, ending with a trawl through more familiar ground in Western Europe.

By now I was drawn into Power and Plenty and could not help noting how strong dynasties all across the seven regions reigned, fractured, leaving usurpers, would-be usurpers and failed usurpers to flit across the generations. From the sheer numbers involved, Findlay and O’Rourke could have called their book, Plunder and Trade without misleading readers, a thought confirmed by Chapter 3, ‘World Trade 1000-1500: the economic consequences of Genghis Khan’, the first section of which, ‘trade and war in the Mediterranean and the Black Sea’ is a fascinating read. The two sections on the Black Death (‘the unification of the globe by disease’) (Roy Ladurie, 1981) remind me of the thesis advanced by Gregory Clark, whom Findlay and O’Rourke cite appropriately.

But throughout this chapter, I couldn’t help thinking of the underlying economic structure. A predominantly agriculture society – foodstuffs, and manufactured artefacts from the land, in Physiocratic fashion – but with a population of the land, another engaged in trade, and a third manning the armies and fleets of the ruling order. I wanted some consideration of the implications that in the midst of the pretty low levels of subsistence and the general poor state of the economic basis of their societies, some of them 'worked'.

To sustain the different populations in each such society, land productivity must have been something of a wonder: soldiers have to eat, people have to produce their weapons, and somebody has to fill the traders’ camel trains with trade goods, ships and modes of transport. No wonder plunder and trade were closely associated. The farming population were kept on subsistence; soldiers could supplement subsistence with private plunder; and some of the surplus had to be diverted to building castles, churches, monasteries, mosques, fortifications, ships, and war weapons, not forgetting the miniscule amounts that went to a few scholars, and the larger amount that build cities.

The combined capital used for these ventures across the ‘civilised’ world through the seven regions had to be formidable by any count. The amount of capital destroyed, or used to no good effect, must also have been formidable. Countries opting out of foreign trade (China, Japan), and regions adopting non-growth inducing policies and activities, plus all the plunder that even the wide prevalence of trade within and between countries that did continue trading relations could not do other than mitigate the imposed preferences of those who ruled them.

With these three chapters in mind I now approach the next three: World Trade 1500-1650: old world trade and new world silver; 'World trade 1650-1780: the age of mercantilism'; and 'Trade and the Industrial Revolution'.

Thursday, January 24, 2008

Adam Smith Was Not A Socialist Nor A Fantacist

Inexplicably, my regular copy of the Times Literary Supplement for 18 January did not arrive last Friday and, as mentioned yesterday, there is a reference to a review of Ian Maclean's 'Adam Smith: egalitarian and radical', in which Adam Smith's Lost Legacy is mentioned (or at least was mentioned by a comment on it on the Blog I commented on yesterday).


This week's issue of TLS has a letter from Bernard Crick, a distinguished professor of politics for many years, a biographer of George Orwell, plus a long-time editor of Political Quarterly.

His letter to TLS (found at Times On-line here) reads:

Body-snatching Adam Smith

Sir, – Richard Bourke is right in his review (January 18) to protest against Iain McLean’s apparent body-snatching in his Adam Smith, Radical and Egalitarian, aided and abetted by the foreword by Gordon Brown. Bourke takes us back to what Smith meant at his time. But this is either a somewhat limited vision or it is disingenuous not to explore why there is body-snatching from both the Left and the Right. Yes, intellectual history must, on the one hand, contextualize; but, on the other, it must explain why the general theory propounded by such a writer must be, if it is a theory at all, applicable to different circumstances in later times. The problem is the same as famously with Rousseau and Rousseauism, Hegel and Hegelianism and (God save the mark!) Marx and Marxism. What creates different readings of such writers? They all create political waves.

Bourke does say that “the combination of scholarship and politics comes at a price” and that Maclean and others “are part of a more widespread endeavour to retrieve Smith from the deforming clutches of Hayekian economic dogma”. Indeed. But he seems to think that it is reasonable to conduct a debate with Hayek himself. Perhaps. Yet he ignores the extraordinary extent to which Adam Smith is invoked by Hayekian radical advocates of an unfettered free market who may not have read The Wealth of Nations at all, almost certainly not The Theory of Moral Sentiments. The price for the inevitable combination of scholarship and politics does have to be paid – a certain open-mindedness to the view not so much that texts are reinterpreted over time but that the applicability of important theories will always be open to politically and morally differing interpretations in different circumstances.


Excellently put by Bernard Crick.

There is much msiunderstanding expressed by those trying to squeeze Adam Smith into or out of modern political affiliations that is not based on what he wrote, but which reflects their own political leanings.

Lost Legacy is not about claiming or disapproving of Adam Smith for Left or Right. It is about asserting the ideas he held and published.

In so far as I make numerous comments of modern interpretations of Adam Smith among academe, many of which have no foundation at all, this brings into focus the expressions of Adam Smith's alleged authority for broadly rightwing corporate habits of aligning Adam Smith with selfish ('greed is good') notions, or irresponsible assertions about whatever individual and corporate leaders regard as maximising their so-called self-interests somehow (appeals to false invisible hands!) is good for society.

These are perversions of Adam Smith's moral philosophy and are not supported textually by Wealth Of Nations, Moral Sentiments, or Lectures On Jurisprudence.

Neither are claims that Adam Smith was some kind of socialist or proponent of ideas expressed by New Labour (Tony Blair or Gordon Brown). Smith was humanitarian in outlook, but socialists and New Labour do not have a monopoly on humanitarian feelings and policies, nor are right-of-centre political parties devoid of them. It is crass to assert the contrary and make such distinctions.

The commercial society that Adam Smith analysed and wrote about was seen as the great change agent for transforming human societies, hitherto notable by their inabilities to raise the per capita incomes of the majority of the earth's population above subsistence - and for many above biological subsistence - while, slowly and gradually, certain societies moved into a position to achieve that historical challenge towards the end of the 18th century. That commercial society succeeded in thwe 19th and 2oth centuries is among the greates achievements of the human species

Smith was a Natural Law theorist (Grotius, Pufendorf, Carmichael, Hutcheson) and the emphasis should be on 'theory', for there had never been any society that conformed to these ideals. Adam Smith was a realist, not a visonary, and he stated firmly in Wealth Of Nations, in repudiating Quesnay and his followers, that Perfect Liberty was not a pre-condition to prosper (otherwise no prosperity would ever have been made by any known human society) (WN IV.ix.28: p 674)

Adam Smith accepted that society, with all of its imperfections (many of which he detailed), would not conform the the purist's demands for total change in everything before anything can be improved. His programme was for slow and gradual change where change could be facilitated, and legislators could be persuaded, to allow some element of economic growth to proceed. From such growth, per capita incomes could rise for the majority of the population (mainly poor labours families), which defied 200,000 years experience of human societies and 10,000 years of recorded history, without disturbing the settled 'great orders' of existing 18th century society.

Socialist and New Labour, and other radical parties (including extremists, both secular and religious) are in a hurry for sweeping changes. This distinguishes them from the philosophy and political economy of Adam Smith. Nothing written on Lost Legacy can possibly lead a reader to suspect or to entertain the notion that Adam Smith was a kind of 'closet' socialist or social democrat. Neither was he a conservative in the modern sense.

He wanted society to change itself; not be changed by politicians who all have a different agenda, and timescale, and a different regard for human beings on the chess board of their fantasies.

Adam Smith on the Origin of Our Moral Sense

Wall Street Journal here:

In the interview, Mr. Gates was emphatic that he's not calling for a fundamental change in how capitalism works. He cited Adam Smith, whose treatise, "The Wealth of Nations," lays out the rationale for the self-interest that drives capitalism and companies like Microsoft. That shouldn't change, "one iota," Mr. Gates said.

But there's more to Adam Smith, he added. "This was written before 'Wealth of Nations,'" Mr. Gates said, flipping through a copy of Adam Smith's 1759 book, "The Theory of Moral Sentiments." It argues that humans gain pleasure from taking an interest in the "fortunes of others."

In the WSJ sidebar is this statement:

The Theory of Moral Sentiments" -- This 1759 book by Scottish philosopher Adam Smith arguing that humans are born with a moral sense and can derive happiness from the "fortunes of others."

I’ll comment on Bill Gates’ speech when it is published, but in the meantime I am not sure the WSJ’s author’s side-bar statement on Moral Sentiments is correct. It was his tutor, Francis Hutcheson , who believed that ‘humans are born with a moral sense’, not Adam Smith.

The point about Adam Smith’s approach is that humans are ‘schooled’ (socialised) by their contact with family and then outsiders to the family in the ‘great school of self command’ (the school playground).

Society is a mirrors to their conduct, from which they learn to lessen behaviours that others find reprehensible and increase those they find acceptable. It is from this process that we 'derive happiness from the "fortunes of others".'

The impartial spectator plays a significant role in this process by approving or disapproving of the individual’s conduct, from which the individual modifies his or her behaviour, necessarily lowering their passions and raising their praise-worthy behaviours.

Adam Smith on Health Provision

Tim McDonald writes in The Evening (here)

I want my medicine

The invisible hand of the marketplace that economist Adam Smith (late 1700s) defined as that invisible relationship between suppliers and sellers that determine what products and services are offered to the market. Adam Smith could not have foreseen the development of healthcare and the dichotomy between competition of the market and the Hippocratic Oath.”

No such invisible hand was defined by Adam Smith as operating between buyers and sellers in markets, nor could Adam Smith ‘foresee’ anything about modern healthcare or lack thereof. He didn’t ‘do’ forecasting.

In his days medical care was fairly primitive, though Edinburgh was better furnished in these respects that most parts of Scotland (and England).

Today, health care is a major business entity and how it should be supplied and on what terms is a major topic full of controversy.

His sole mention about health provision is in Book V of Wealth Of Nations where at the tail-end of a section of the education of youth he suggests:

In the same manner as it would deserve its most serious attention to prevent leprosy or any other loathsome and offensive disease, though neither mortal nor dangerous, from spreading itself among them; though, perhaps, no other publick good might result from such attention besides the prevention of so great a publick evil’. (WN i.f.60: pp 787-8

To what extent he might have contemplated a general role for government funding in health matters is purely speculative.

Living, as I do, within a National Health Service in the UK – definitely overburdened with a State managed system – there is much scope for introducing a wider variety of private funding and commercial management of health delivery within a system of ‘free at the point of need’, as there is probably scope to introduce publicly funded, but definitely not publicly managed medical services (Adam Smith distinguished between these forms of delivery) in some totally privately funded schemes in other countries. I recently have used both the NHS (free to use) and the private health sector (pay for use).

For Adam Smith, what worked was more important than what ‘men of system’ proposed or imposed.

Wednesday, January 23, 2008

How Left or Right Was Adam Smith?

Fred Siegel writes in Commentary (, "Mr. Smith Bears Left" (here):

The collapse of even watered-down versions of Marxism has fruitfully pushed a number of leftist British intellectuals into a reconsideration of Adam Smith. The publication in 2001 of Emma Rothschild’s Economic Sentiments: Adam Smith, Condorcet, and the Enlightenment set off a flurry of efforts to reclaim Adam Smith from “the Right.” Rothschild rightly saw that Smith was far from the caricature of a heartless demonic elitist so dear to left wing prayer books. Three years later, Gareth Stedman Jones followed up with his book An End to Poverty, which applauded Smith for his anti-statism.

Now, according to January 18 TLS, new books on Smith have entered the lists. Two of them—Ian McLean ‘s Adam Smith, Radical and Egalitarian and Gavin Kennedy’s Adam Smith’s Lost Legacy—try with a less than scholarly touch to claim Smith for New Labor. Prime Minister Gordon Brown, a Scotsman, has written the introduction to the MacLean volume. Brown, playing up the Scottish card, claims that “Coming from Kirkcaldy as Adam Smith did, I have come to understand that his (1776) Wealth of Nations, was underpinned by his (1759) Theory of Moral Sentiments” which saw “neighborliness” as crucial to mitigating the underside of economic competition. By this Brown, following McLean, argues that Smith was as much a theorist of social justice as an economist.

Taken in a Tocquevillian light this might seem innocuous. But, in the name of “neighborliness,” MacLean and Brown want if not to replace then at least to displace “the invisible hand” of markets with the “helping hand” of the state. This argument, depending on how you look at it, is either a hypocritical perversion of Smith or a thoughtful means of reconciling British leftists to global competition.
An answer, of sorts to Brown, comes from the Torie’s shadow chancellor George Osborne in his introduction to a new edition of The Wealth of Nations. Osborne sees Smith as the definitive answer to the shapeless anti-market ideology of the anti-globalization movement which has no positive program but is skilled at playing Cassandra. Osborne accurately sees economic nationalism as the road to perdition. But invoking Smith is scant guide for how either the Brits or the Americans should respond to the neo-mercantilist sovereign wealth funds of China and some of the Gulf States which invest politically in open societies while closing their own borders to foreigners.

Smith who was a moral ironist would no doubt be amused at the attempt by contemporary British politicians to enlist his writings in their causes. He once, after all, define an elected official as “that insidious and crafty animal vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuation of affairs.”

I have not yet read the review in the Times Literary Supplement for 18 January (my subscription copy did not arrive last Thursday by post), so I cannot comment on any references to my ‘Adam Smith’s Lost Legacy’.

However, I hope I not included in contributing to a left-leaning Adam Smith or to any endorsement of New Labour and Prime Minister Gordon Brown. While Ian McLean‘s ‘Adam Smith, Radical and Egalitarian’ makes such claims on his own behalf, I certainly do not.

Gordon Brown often makes claims about “Coming from Kirkcaldy as Adam Smith did…Gordon Brown, in fact, was born in Glasgow on 20 February 1951 and lived in Glasgow until he was 3, moving to Kirkcaldy in Fife where his father was a Church of Scotland Minister. He was brought up in Kirkcaldy, but not quite like Adam Smith, who was born in Kirkcaldy in 1723 and brought up there until he went to Glasgow University in 1737.

Adam Smith’s politics are not easy to untangle. Donald Winch, the eminent historian, wrote Adam Smith’s Politics which does not show him to be unambiguously of any particular persuasion, though he was not a Tory. He and his father were supporters of the Hanoverian constitutional monarchy when the Tories in the main supported the deposed King James in the 1688‘revolution’.

You can read into Adam Smith’s works practically any politics you can imagine. He does not conform to some of the wilder ideas of the Right in US academe – he did not advocate laissez faire, for instance and he was not against governments having roles in the economy, though he strongly opposed the specific interventions advanced by mercantile political economy (Book IV, Wealth of Nations).

The important consideration is that he preferred market solutions where practicable and had in mind a separation of initial funding to construct the project distinct from the issue of the public or private form of management of it. Gordon Brown and New Labour are wedded firmly to the idea of State management, in conjunction with major roles for public sector trade unions.

Adam Smith also had firm ideas on the affect of colonies on a country’s own growth and development. His advice at the end of the Britain’s colonies in North America was that the country should adjust itself to ‘the mediocrity of its circumstances’. Unfortunately, his advice was not taken and Britain slid into a second Empire, and even after removing itself from that experience it continues to see itself as a necessary force for intervention in world affairs, at great cost to its economy in treasure and not a little in blood.

In short, the Right’s past monopoly if their interpretation of Adam Smith is a necessary focus for defending his legacy; it is not in any sense a prelude to defending a left wing interpretation of Adam Smith.

If this version of Adam Smith was more prevalent it would attract critics such as myself to set the record straight.

When I receive the relevant TLS, I shall no doubt comment on the review in more detail.

On Editions of Wealth Of Nations of Varying Quality

The News & Observer runs a feature (from The New York Times) (23 Jan) here:

New in paperback: The latest releases.

"The Wealth of Nations," by P.J. O'Rourke (Grove). Adam Smith's treatise revolutionized economic thought when it was published in 1776; it established the intellectual foundation of capitalism and free markets. But today few readers make it all the way through the more than 900 pages of Smith's convoluted prose.”

The problem with popularising ‘Wealth Of Nations’ (of which many have attempted over the years 19th to 21st century) is that their authors are prone to errors, some of them fundamental, not least recently because they usually adopt the neoclassical and general equilibrium Chicago version of Adam Smith which is often a travesty of his actual views (even his actual words).

To some extent this is not the fault of the authors, though sometimes it is, because they take on trust what prominent modern economists, including Nobel Prize winners (no mean gold standard) report about what Adam Smith’s political economy was about.

On occasion accomplished economists introduce a strict reprint of Wealth Of Nations, but their introductions, and sometimes their footnotes, are extraordinary examples of ‘there’s none so blind as those that cannae see’, when their ideas of Adam Smith’s work is contradicted within the text they presumably have read before appending their names to the introduction they wrote.

Not all such introductions to Wealth Of Nations are of such a sloppy vintage. One such counter-example to the sloppy, inaccurate and, in my view, tendentious editions, in which the author of the introduction shows how to introduce Wealth Of Nations accurately and close to Adam Smith’s intentions, is to be found uniquely in Andrew Skinner’s Penguin editions of Books I-III (1970, reprinted 1986) and Books IV and V (1999), in which he provides excellent essays on Adam Smith’s scholarship.

The two other modern editions of Wealth of Nations that are outstanding are the Edwin Cannan’s, 1937 edition (Random House) which is still widely quoted by modern scholars, in which he edited (including the footnotes, notes and marginal summary) and shows a scholar at work. The other excellent example modern scholar’s Glasgow Edition of the ‘Works and Correspondence of Adam Smith’, Oxford University Press, edited R. H. Campbell and A. S. Skinner (textual editor, W. B. Todd), well known for its unique textual reference system.

From a personal view point, I would welcome an opportunity to present the Wealth Of Nations and comment on it as Adam Smith of Kirkcaldy intended it, with special attention paid to all the places where his legacy has been substituted in modern economics for something smuggled in by sloppy editors, more intent on slipping in their own ideas in place of Adam Smith’s. But that’s another project for sometime in the future, perhaps, should I live long enough.

I realise I have said nothing about P.J. O'Rourke or his version of Wealth Of Nations. If it leads to some of its readers going on to read one of the edited versions of Wealth Of Nations I have listed above (Andrew Skinner, Edwin Cannan, or Campbell, Skinner and Todd) then it will be a good thing.

PS When reading Cannan’s magnificent 1937 edition, readers may safely ignore the short ‘introduction’ by Max Lerner.

Tuesday, January 22, 2008

Sam Fleischacker on Adam Smith on Inequality in Commerce

The 2nd annual Adam Smith Review contains a multitude of excellent scholarship and debate from well-kent names among leading Adam Smith authors.

In one of three symposia (in which several authorities write short comments on an author’s latest book and the author responds) Samuel Fleischacker’s On Adam Smith’s Wealth of Nations: a philosophical companion (2004) is discussed by Ryan Patrick Hanley, Jerry Z. Muller, Frederick Neuhouser and David Raynor.

It would be invidious to capture the essence of the debate. Instead I wish to quote from Samuel Fleischacker’s response to a topic that certainly interested me in my new book, Adam Smith: the moral philosopher and his political economy (in press Palgrave) and I think is of contemporary interest.

The theme since the 18th century, with Rousseau in particular and with much 21st century comment is inequality. Rousseau contrasted 18th century inequality with the freedom alleged enjoyed by the hunter in early human society and the equality that he imagined prevailed. Marx or Engels called this ‘primitive communism’. Adam Smith called it the equality of poverty (and added that these hunting tribes of North America/Africa were ruled by ‘princes’ with absolute power over their equal subjects).

Here is a short extract from Sam Fleischacker’s response (at 600 words I am close to trespassing on the copyright boundary)

When we turn to pastoral and agricultural societies, we find a vast increase in inequality over the hunter-gatherer stage. Smith say in his lectures on jurisprudence that in pastoral societies ‘the inequality of fortune makes a great odds in the power and influence of the rich over the poor than in any other’ (LJA IV.8), and he details and why this is so both there an in WN (III.iv.4-7). In WN, it is clear that much the same sort of inequality continues into agricultural societies, and this is a point of great importance for Smith’s critique of feudalism. The decline of feudalism is above all a decline in the political power of large landlords, and an increase in the number of people in society whi have some political say, as well as in those who are reasonably ‘independent’ of those for whom they work. So the rise of commercial society brings with it an increase in equality – an equality of exactly the kind that most interested Rousseau: social and political equality – over the types of society that preceded it. That doesn’t mean that commercial society is equal relative to hunter-gatherer society, but the latter, as we saw, was a condition of great unfreedom. There is therefore a very good case to be made, if Smith is right about the empirical facts, that commercial society provides the best distribution of freedom the world has ever seen.

This transforms the difference between Smith and Rousseau into a difference over the relevant benchmark against which to measure the inequalities of commercial society. Rousseau could still hold that we should compare commercial society, not with past actual societies, but with the condition of self-sufficiency he imagines in the Second Discourse. Smith would probably respond by noting that that condition never existed, and asking why, therefore, we should think it possible. But this is not a fully adequate response, since Rousseau could say in turn – and this is one reading of what he might mean by the facts not being relevant to his project – that anything we can imagine is possible for us, that we should not limit ourselves, in figuring out what sort of society we want, to what human beings have done in the past but seek rather to create something new, something in accord with our ideals rather than our history.

And it is here, at the level of methodology, that I think Smith has his deepest and most interesting answer to Rousseau. Smith is not opposed to social reform, to changing society when we see it as seriously wrong in some respect – and he has in fact some proposals for reducing inequality – but he rejects the idea that we can determine what those changes should be without doing history. He rejects the idea that our imaginations alone can be an adequate guide to social change. I take it that that is indeed the fundamental reason why he put all his efforts as a social theorist into a book like WN, rather than writing up a speculative constitution, as his friend Hume did, or responding directly to the Second Discourse. The imagination, left alone, is unreliable, and may lead us to fantasise away the basic limitations of human nature – as Smith, I am sure, thought Rousseau had done when he imagined a world of people who were both independent of one another and materially self-sufficient. So while the imagination is useful (both Smith’s moral theory and his political economy can rely on imagination in fundamental ways) it needs to be constrained by a close examination of actual history. History is a way of distancing ourselves from our own fantasies about human nature; it provides an external check on introspection.”

Sam Fleischacker, 2006. On Adam Smith’s Wealth Of Nations, Response’ in The Adam Smith Review, ed. Vivienne Brown, for the International Adam Smith Society, Routledge, Oxford

I consider this a brilliant exposition of the important theme of history running through all of Adam Smith’s works. My independent version in Adam Smith (2008) is bare-boned in contrast, though it states the main point. Samuel Fleischacker is a philosopher and writes beautifully; he also writes with a great command of Adam Smith’s oeuvre because he has grasped his philosophy of history. I certainly owe a great deal to him.

Read the Excellent Adam Smith Review (annual)

The 3rd issue of the Adam Smith Review, edited by Vivienne Brown, Professor of Intelelctual History, Open University, was published in 2007. I have only just received a copy because Adam Smith’s Lost Legacy (Palgrave) was reviewed by Professor E. J. Harpham (University of Texas at Dallas) and the practice of the ASR is to allow authors a response. (It was a fair review, of which critical parts I accepted.)

My reason for posting on this is because it was only a short time earlier I managed to get a copy of the 2nd issue, to which I shall comment enthusiasticaly in the next post. When I heard about the first issue of the ASR I acquired a copy via Amazon (very expensive it was too at over £100). I discovered that if you joined the International Adam Smith Society (IASS) as part of your annual subscription you received the ASR at a heavily discounted price.

That’s when my trouble began. You have to pay via Pay Pal (US). That’s when I clashed with the ‘system’. In the midst of transferring about £20, Pay Pall changed its ‘system’ and required British customers to use Pay Pal (UK). My money got lost somewhere; I had sent it to the wrong address and I could not retrieve it. Then followed several emails of the spam type seeking details. I gave up as it looked insecure.

Now be clear, readers, I buy many books a year via Amazon US and UK, and pay via the card systems in place. I have never had any trouble at all.

I have tried to no avail to join the IASS via round-about methods to get round this Pay Pal fiasco. Last year I had similar trouble registering with the 35th Annual Conference of the History of Economics Society and was ‘saved’ by its excellent administrative staff to avoid Pay Pal and use a credit card.

This problem presently is holding up my making a cash donation to the 2008 Summer School at GMU for Young Scholars. Why disrupt a world-wide perfectly functioning Visa/Master Card system by insisting on adopting Pay Pal?

So, while I strongly recommend to you both the IASS and the ASR as essential tools of a student of Adam Smith I cannot help you acquire the reviews, except via Amazon. They are well worth the money – get your library to order them unless you have Pay Pal. Your students and colleagues will benefit enormously (see next post)

The International Adam Smith Society is contacted via: or via Aaron Garrett (garrettnecessary AT gmail DoT com)

Monday, January 21, 2008

A Common Error About a 'Nation of Shopkeepers' Repeated in the FT

Maija Palmer posts on FT.Com (20 Jan) a piece using an alleged statement by Adam Smith that is a distortion of history:

Shoppers find goods well recommended:

“When the 18th century economist Adam Smith described Britain as a “nation of shopkeepers”, he had bricks-and-mortar premises in mind. Yet a new online service enabling users to set up their own internet shop in five minutes without having to stock any merchandise could make his claim a virtual reality.”

Adam Smith did not quite say this. What he did say in relation to the mercantile policies pursued by the British government, which imposed (backed by the might of the Royal Navy) a total monopoly on trade with (imports and exports) in the British Colonies in North America:

“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.” (WN IV.vii.c.63: p 613)

It was Napoleon who described, sarcastically, Britain was a ‘Nation of Shopkeepers’, not Adam Smith. The repetition of such small errors eventually becomes a set belief (like not visiting a pin factory!) and Adam Smith's legacy is chipped away.

The Impact of Blogging on Sorting Out Differences of Fact

Tim Worstall, the prominent, independent UK blogger, picks up the ‘did he or didn’t he’ visit a pin factory before writing about the division of labour in Wealth Of Nations in The Business magazine (here): Trading Floor - The Business Blog (here)

“A Tiny Technology Story

Tim Harford's new book (the follow up to Undercover Economist) is hardly out of the starting gates and already there's been some criticism. OK, OK, the actual point is very minor: did Adam Smith actually visit a pin factory or was he cribbing from earlier writers? Tim says the latter, Gavin Kennedy insists that he put up or....
Well, you can see how it all worked out here. Yes, he did and Tim H is a very naughty boy. As are some of the others. My only involvement in all of this was tweaking Tim's nose about it via email when the original point was noted.
Aside from all of this trivia, there's one other thing I think interesting. The speed with which all of this was worked out. The original contention, that Smith didn't, was published last Wednesday, as was the assertion that he did (we're still in panto season, aren't we?)

We're now only at Monday and we've got the whole thing sorted, down to the footnotes of which earlier writers he did reference, as well as who was at fault for the implication that he hadn't also visited such a manufactury himself.

That's really rather quick, don't you think? Only two decades ago this would have taken months of back and forth letters (of the type that Bernard Levin loved so much) in the TLS or some such, perhaps the NYRB or LRB.”

Tim, as usual, say’s it all I think.

Adam Smith's Biography is Controversial

Vademecum (‘For those who go out of their way to step on a crunchy-looking leaf’) post a piece (here) 21 Jan on Adam Smith written by somebody (unnamed) who describes him/herself as: “a passionate lover of humanity and life, an enthusiastic artist, a bespectacled Romanticist, a person you’d see simultaneously discussing Tolstoy and Opeth over a cuppa tea, or laughing at the classic “banana peel” prank.”

Make of that what you will of that – he/she is obviously someone with a lively personality.

Adam Smith’s Marketplace - Father of Economics” Adam Smith (1723-1790) – Adam Smith was born in Scotland. At the age of 3, he was kidnapped by gypsies but soon rescued. A sickly child, he was in the habit of talking to himself when alone and remained absentminded throughout his life, although he had an extraordinary memory. At the age of 28, he became professor of moral philosophy at the University of Glasgow. He was a popular lecturer, and his classes were very well attended. At the age of 40, after the publication of his first book, The Theory of Moral Sentiments, he accepted an appointment as traveling tutor to the young duke of Buccleuch. He accompanied the duke to France and became acquainted with the intellectual leaders of the country, including a number of Physiocrats. When he returned to England, Smith worked on his masterpiece, The Wealth of Nations, for a decade before its publication in 1776. Two years later, he was appointed commissioner of customs in Scotland. Not long before his death in 1790, he expressed the regret that he had “done so little” in his lifetime.

Adam Smith is considered the father of economics. Before him, economics was studied as a branch of politics called political economy or as an area of philosophy. Economics was born as a distinct discipline with the publication of Smith’s The Wealth of Nations in 1776. It was a remarkable book setting forth expositions of basic economic ideas which hold up very well today, along with a mind-boggling amount of factual data.

Among the most important and enduring contributions to economic thought was Smith’s explanation of the beneficial workings of the free marketplace. He explained market equilibrium as follows:

"The quantity of every commodity brought to market naturally suits itself to the effectual demand. It is the interest of all those who employ their land, labour, or stock [capital] in bringing any commodity to market, that the quantity never should exceed the effectual demand; and it is the interest of all other people that it never should fall short of that demand.”

A major thrust of The Wealth of Nations was that the market prices and quantities should be permitted to adjust to their equilibrium levels without any interference from the government. Smith was arguing in opposition to the system of mercantilism under which the government exercised a great deal of control over economic life. The government regulated production and trade with the objective of bringing gold and silver into the coffers of the state.

Smith contended that a nation’s real wealth would be maximized by allowing individuals to make economic decisions based on the forces of the marketplace, unhindered by government regulations. He maintained that in pursuing their own self-interest, people would be guided by an invisible hand to maximize their personal contribution to the economy. Smith’s views have been greatly influenced by the 3 years he spent in France associating with the French Physiocrats. The Physiocrats promoted a policy of laissez-faire, which called for the government to keep its hands off trade and allow prices to seek their natural levels.

Because of his laissez-faire doctrine, Adam Smith is greatly admired by economic conservatives today. But Smith was anything but a conservative in his day. He was, in fact, someone that we might today call a consumer advocate, protesting the special interests backed by governments that profited at the expense of the general public.

Always a pleasure to see posts on Adam Smith that inform readers of aspects of his life and works. It’s an even greater pleasure for such posts to avoid known errors and controversial statements. So let me offer some comments along the lines of what would make a more accurate biography of his life and work.

A sickly child, he was in the habit of talking to himself when alone and remained absentminded throughout his life, although he had an extraordinary memory.”

This is certainly reported about him which, however, I have always felt that this version (mainly from diverse anecdotes) is in steep contrast to his well-defined highly effective role throughout his adult life as an administrator: his central work on the University of Glasgow’s Senate and its “Principal’s Committee”; his central role as a Scottish Commissioner, where he signed the majority of its letters and reports issued by the Commissioners between 1788 and 1790; his effective ‘political’ work relating to his own advancement as an academic under the patronage of the Duke of Argyll and his working for the appointment of others to various posts across public life; and his ‘consultancy’ work for British governments, including for Prime Ministers and their cabinets. The people who described him as ‘absent minded’, etc., were mainly social voyeurs, who reacted negatively to his lack of deference to them, e.g. Alexander Carlyle.

Before him, economics was studied as a branch of politics called political economy or as an area of philosophy. Economics was born as a distinct discipline with the publication of Smith’s The Wealth of Nations in 1776.”

Adam Smith was a Professor of Moral Philosophy who taught political economy as part of the traditional Scottish syllabus (Scotland had four universities at the time, England has two). His Wealth Of Nations repeated verbatim much of the materials he taught in his classes during 1751-63 (A. Smith, Lectures on Jurisprudence, 1762-4). He was not an economist. Political Economy remained under that name until the end of the 19th century; it was not ‘born’ with Wealth Of Nations. It was never a branch of ‘politics’; it was subsumed under ‘moral philosophy’.

Among the most important and enduring contributions to economic thought was Smith’s explanation of the beneficial workings of the free marketplace. He explained market equilibrium…”.

I have a lot of problems with this representation of Adam Smith’s political economy. He most certainly was not a theorist of economic equilibrium. Quite the opposite, in fact. The very example given in its context is from a section discussing why the ‘market’ price never settles at the ‘natural’ price; why it gravitates around the natural price, mainly because events occur that disturb the prices demand and supply of the factors, Land, labour, and Capital, and their prices (rent, wages, and profit).

Further, in the division of labour, all the contributory elements that make the, often long, supply chains operational are subject to continual re-divisions of labour and increased specialization, such that unit prices constantly vary as they induce changes in the extent of all the markets and sub-markets that make up the economic system. This is why Adam Smith was not a progenitor of general equilibrium theory. Additionally, he was a theorist of increasing returns and not decreasing returns, the latter of which became, via David Ricardo, the cardinal principle of what became economics. Only recently has Adam Smith’s insight been fully appreciated (starting with the ‘re-discovery’ of Allyn Young’s seminal article of 1928).

‘unhindered by government regulations’.

Another popular notion belied by his views expressed in Wealth Of Nations. Book IV of his work is a stiff critique of government regulations and interference in pursuit of mercantile political economy. But – and it is a big ‘but’ – there is much in Wealth Of Nations showing that he was not opposed the government regulations on principle, especially when they ensured competition on markets, investment in infrastructure that facilitated competition, when they ensured fair treatment of consumers and prevented fraudulent commercial practices, when they were essential to educate children through local schooling, where they would alleviate suffering from ‘loathsome diseases’, and where they were essential for defence of the nation (Britain is an island). Above all, the favoured government funding of an independent justice system.

The actual list of area necessary for government were far more extensive that simply transposing his criticism (he called critique ‘a very violent attack’) from the errors of the government policy of his day into a criticism of the necessary roles of government in general.

Smith’s views have been greatly influenced by the 3 years he spent in France associating with the French Physiocrats. The Physiocrats promoted a policy of laissez-faire, which called for the government to keep its hands off trade and allow prices to seek their natural levels.
Because of his laissez-faire doctrine, Adam Smith is greatly admired by economic conservatives today

Adam Smith did not advocate laissez faire. He did not have a ‘laissez-faire doctrine’. He never used the words, though was familiar with them. He met with the Physiocrats (not all of them favoured laissez faire) in 1765-66. In 1755 he outlined his views on markets in 1755, long before he met them, and his Lectures on Jurisprudence (1762-4) show him to be fairly well set in his analysis of how economies worked before he met with them. He strongly opposed their ideas on the sole productivity of agriculture and their confining of labour productivity to the ‘sterile’ category. That some ‘conservatives’ confuse themselves about laissez-faire is a pity because it weakens their case.

After all the above I am happy to say I am more likely to agree with the post’s author’s last sentence:

Adam Smith was ‘a consumer advocate, protesting the special interests backed by governments that profited at the expense of the general public.”

Adam Smith Vindicated on His Visit to a Pin Factory

I received a reply from David Warsh this morning with a full, and typically authoritative, account of the issues in dispute, and its background, and an acknowledgement that he accidentally misled Tim Harford on the matter of Adam Smith's visit to a pinfactory employing ten men before he wrote Wealth Of Nations.

You will his full account at his Knowledge and the Wealth of Nations here: David's account of the relatively small issue of his clear statement that he did visit one such manufactory, possibly one near his mother's home in Kirkcaldy, or one such in Glasgow while he taught at the university, is thorough, clear and absolutely authoritative.

You should visit his book's blog and receive regular articles - of the highest standard of composition - on a wide range of subjects of interest to economists - he knows most of the main economists of the past 40 years and of their works.

Thus, Tim Harford is completely exonerated for his copying the allegation that Adam Smith did not visit a pin factory and that he simply wrote about one in his home. Apologies to Tim: his book should arrive soon and I shall review it here. Incidentally, there is to be discussion on the Marginal Revolution Blog starting this week on Tim's book.

Incidentally David refers to the article by J-L. Peaucelle. 2006. ‘Adam Smith’s use of multiple references for his pin making examples’, European Journal of the History of Economic Thought, 13:4, pp480-512.

At the risk of somebody claiming to the contrary, I read this article at the publisher's table during the History of Economics Society's 34th annual conference at George Mason's University, Fairfax, Virginia, last year and it is cited in my bibliography for the new book, 'Adam Smith: the moral philosopher and his political economy' (Palgrave: in press). As it took an hour of more, scores of participants must have seen me, reading and taking notes!

Now, if only Adam Smith had visited the pin factory so openly, and taken witness statements, we wouldn't have these allegations about his scholarly honesty in circulation. I still blame Murray Rothbard for becoming 'unbalanced' on this issue.

Sunday, January 20, 2008

David Warsh is Named as the Source for the Allegation that Adam Smith Did Not Visit a Pin Factory

I have been busy today replying to various correspondents on the question of who supplied the notion that Adam Smith did not visit a pin factory his exposition of the division of labour in Wealth Of Nations, even though he specifically states that he did (WN I.i.3: p 15, or in the Cannand 1937 edition, p 5).

From three sources , including Tim Harford, the name of David Warsh has been mentioned, with one correspondent supplying the quotation on page 40 of David Warsh’s influential ‘ 'Knowledge and the Wealth of Nations’(2007).

I have emailed David Warsh asking for his source. David is a leading journalist reporting on broad economics issues and he is highly thought of within the profession. I have read his book and I heard him give a paper at the History of Economics Society last June at George Mason University. He was a most charming and gracious conversationalist.

When I receive a reply I shall return to the subject.

For the record I locate the original source in a book by Murray Rothbard, recently posthumously published by the Mises Institute, which I reviewed and critiqued in 2006.

The comments I made are available on Lost Legacy in the Article’s button (left hand column on the Home page of Lost Legacy – scroll through to ‘division of labour’ when it comes up in the edit ‘find’ function).

There is an interesting post of the current debate here on the ‘antidismal’ blog (New Zealand).

Saturday, January 19, 2008

The Irony of Tim Harford's Book's Title

Adam Gurri of Sophistipundit (here) reports on Lost legacy’s challenge to Tim Harford to provide the evidence for his assertion that Adam Smith had not visited a pin factory but merely wrote about one while sitting in his mother’s house in Kirkcaldy and perusing an encyclopaedia.

Adam Gurri's reaction to Tim Harford's book: “I was already having difficulty getting this book in...with frivolous scholarship like this, I might just chose to skip it for the time being.” My copy is on order and is due any day.

Accusations that Adam Smith Lied Continue to Spread

The Bayesian Heresy posts excerpts from Tim Harford’s Logic Of Life containing the accusation against Adam Smith that he lied. (here) I sent a comment to ‘Marshall Jevons’, which I hope he responds to or at least asks Tim Harford to do so:

The problem with Tim Harford’s account of the division of labour is this sentence:

Adam Smith never actually visited a pin factory. While sitting at home in Kirkcaldy and penning the most famous passage in economics, he was inspired by an entry in an encyclopedia.”

Yet Adam Smith in Wealth Of Nations makes the specific statement that ‘I have seen a small manufactory of this kind [the process described as the ‘18 operations’ to produce pins] where ten men only were employed, and where some of them consequently performed two or three distinct operations’.
(WN I.i.3: p 15)

Tim Harford has been asked for the evidence for his assertion that Adam Smith never visited a pin factory. Smith most likely took the French 18 operations from Diderot’s Encyclopedia (1755 (épingles), which was also based on Chamber’s Cyclopaedia (1741).

But if Adam Smith states in his major work that he visited a ‘small manufactory’ he most certainly did, or he would be guilty of a most infamous lie.

He most probably visited one of which there were several near him in Kirkcaldy (1766-73), though at the time when he first made notes on the division of labour in his ‘Early Draft’ (1762) he was teaching in Glasgow and there were many manufactories (small forges, etc.,) nearby.’

I await Tim Harford’s explanation for his assertion. His literary image of Adam Smith composing the line ‘while sitting at home in Kirkcaldy and penning the most famous passage in economics’ is purely from Harford's imagination.

What we know of Adam Smith’s composing method he used an amanuensis – a writer who listened to his dictation – and he was fairly active in visiting sites of economic activity during the years in which he wrote Wealth Of Nations, of which drafts have survived since the 18th century and are accessible today.

Silly Saturday Stories about Adam Smith no 13

Glen Smith posts “China-Taiwan Showdown Involves Politics, PCs” in PC (‘the independent guide to technology’) here

Somehow the genius of globalization -- Adam Smith's "Invisible Hand" – has located the workshops of the digital age on opposite sides of the Taiwan Strait. But, there is a twenty year technology gap between them. In effect, tiny Taiwan is the ODM/OEM brains and gargantuan China is the dumb, assembly brawn. Neither can exist without the other.”

That’s a new one – ‘the genius of globalization’- but just as meaningless as its predecessors.

Silly Saturday Story on Adam Smith no 12

Today Christie Loh writes ‘Transport’s big bang rolls in with bus shake-up: routes thrown open to competitors, rails not seen as rival’ (19 Jan) (here):

A shake-up like never before is about to hit the public bus industry, through a series of gradual measures that will combine government intervention with Adam Smith's invisible hand to make fares fairer, raise service standards and integrate bus services more seamlessly with train networks

What a hard working metaphor the invisible hand has become since his ‘discovery’ as a ‘concept’, ‘idea’, ‘principle’, ‘paradigm’ and ‘theory’ in the 20th century by somebody scrolling through volume 1 around page 456 who decided to credit the metaphor with all it has been since then.

It was a reasonably safe, not bold, assertion to make because almost everybody who believes the fairly well-known metaphor is all it’s credited with is unlikely ever to read Wealth Of Nations for themselves and realize it’s a myth.

Though, I should say from my experience that even some of those who are scholastically qualified to understand Adam Smith’s politically economy, act outrageously by refusing the realize the implications of perpetuating a solid error and by defending their intentions to continue referring to the invisible hand in the manner they do despite Adam Smith’s clear statements to the contrary.

Silly Saturday Stories About Adam Smith no 11

Dinesh D'Souza, reports on a debate he had with Michael Shermer (of whom I know not, but the debate is about Christianity and atheism, which you can read here) on News Bloggers (‘hard news,raw opinions, penetrating perspectives’):‘An Atheist Who Got Something Right’ (18 Jan)

"Like Darwin, Adam Smith understood human nature. Consequently he knew that no economic or social system could effectively eradicate selfishness from human nature. (When the atheist Communists tried to reform human nature, they found they could do it only by killing the human being.) Selfishness, like lust, seems to be part of the human condition. Capitalism seeks to civilize greed in much the same way that marriage seeks to civilize lust. In Smith's view, the market through the "invisible hand" of competition channels the powerful engine of human self-interest toward the material betterment of society. In a shrewd analogy, Shermer likens Smith's "invisible hand" of competition to Darwin's "survival of the fittest."

It’s not clear which is speaking: Dinesh D'Souza or Michael Shermer, but whichever it is, they are talking nonsense, in respect of their attribution to Adam Smith of the usual distortion about ‘an invisible hand’ of ‘competition’. For detailed exposition of why it’s nonsense scroll down through the Lost Legacy archives.

Silly Saturday Stories About Adam Smith no 10

In Reflections on everything (‘Write to be understood, speak to be heard, read to grow — Some dude’) here

This point, however, seems to be lost on people like Milton Friedman (who is a Nobel Laureate in Economics), whose statement was used in the Microeconomics textbook that I use to defend the laws of utility theory. The argument goes something like this: Just like the pool player does not know the laws of physics, but still knows ’somehow’ that hitting the ball in a certain place will make it go a certain way, models of economics are made ‘as if’ the individual were trying to maximize profit. If it fits reality , good, else too bad. To put it more simply, balls on a pool table cannot hear the laws of physics, but they follow it anyway, don’t they ? So, when Adam Smith discovered the ‘Invisible Hand’, and wrote an enormously influential treatise to propagate his ideas, people reading the treatise ‘realised’ that yes, this is very close to what they are doing.”

Adam Smith did not "discover the ‘Invisible Hand’". He used a fairly common metaphor (used by Shakespeare and Defoe, and many others) near the end of Wealth Of Nations to represent an instance to do with risk aversion, which had nothing to do with markets (which dominates the first chapters of his book). Its general attribution to all economic behaviour is an invention of 20th century economists, most of whom have not read Wealth Of Nations.

Friday, January 18, 2008

Denise Soong Repeats Tim Harford's Assertion About Adam Smith

Denise Soong (life is ironic’) here, wrtitng about ‘Divorce is Good for Women’.

She posts the excerpt from Tim Harford’s book, The Logic of Life and taken from Slate, which I commented upon critically in Lost Legacy yesterday.

Adam Smith, the father of modern economics, traveled Europe as tutor to the Duke of Buccleugh. But despite his travels, Adam Smith never actually visited a pin factory. While sitting at home in Kirkcaldy and penning the most famous passage in economics, he was inspired by an entry in an encyclopedia. The passage is no less important for that.”

It’s more important that Denise Soong realise that the assertion she has passed on innocently, I am sure, about Adam Smith not visiting a pin factor is false.

A correspondent writes to me privately to report that Tim Harford (whom he knows) responded to news of my challenge to him to provide evidence for his accusation that Smith did not visit the pin factory he said he had visited (mentioned specifically in Wealth Of Nations WN I.i: page 15), that he took it from a book by James Buchan: Adam Smith and the Pursuit of Perfect Liberty (Profile Books, London, 2006).

Now I reviewed James Buchan’s book in April 2006 and then the paperback in June 2007. Here is what I said:

James Buchan's New Book on Adam Smith is Excellent Value
Profile Books, London, has published the paperback edition of James Buchan’s, Adam Smith and the pursuit of perfect liberty, first published in hardback in 2006. I said then (April 2006) and I say again that James Buchan’s book is:

“An excellent and authoritative read, it is an excellent route into Adam Smith, absent specialist jargon, and, as far as I can discern on a first reading, absent any of the grosser errors associated with Adam Smith and his legacy

Now that is a hostage to fortune! No ‘grosser errors’…

I did not notice anything about Adam Smith not visiting a pin factory and unless Tim Harford comes up with a reference I not inclined to admit to an error.

However, given that Tim Harford has received the exact reference in Wealth Of Nations from me via my correspondent, he is beholden to accept that his statement is in error, and undertake to correct it at the next printing.

That is what scholars, journalists, and pundits do, when acquainted with errors.

Adam Smith on Profits or Wages Causing High Prices

Altercation by makes a couple of quotations from Adam Smith in Media Matters from America (17 Jan) (here)

Speaking of stimuli, conservatives like to claim Adam Smith as their patron saint but the man was a liberal through and through. (For extra credit, find him here.) Anyway, look at this quote of his I found in Paul Starr's Freedom's Power: The True Force of Liberalism (Basic Books, 2007):

Far from being an apologist for the capitalist class, Smith showed his sympathies for workers throughout The Wealth of Nations. In his chapter on "Profits of Stock," for example, he wrote, "Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price and thereby lessening the sale of their good ... They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."

Also this one:

"Servers, labourers, and workmen of different kinds make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed cloath, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed, and lodged."

Seems fair enough to me, especially the second quotation, which features at the end of my new book, Adam Smith: the moral philosopher and his political economy’ (in press; Palgrave Macmillan, ‘Great Thinkers in Economics’ series).

The first quotation is from the debate about the relative role of profits and wages in prices (WN I.ix.24: p 115) and Smith’s conclusion from his discussion of the economics is about right, in my view: ‘They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.’

In Book IV (viii.c: 25-29) Smith returns to this theme and addresses the debate among those who supported mercantile political economy (mainly the merchants and manufacturers, and those who legislated under their influence) and those few, like Adam Smith who did not.

Here is the relevant context from Wealth Of Nations for his repetition of the same accusation (it's worth reading the chapter):

Secondly, this monopoly has necessarily contributed to keep up the rate of profit in all the different branches of British trade higher than it naturally would have been, had all nations been allowed a free trade to the British colonies.
The monopoly of the colony trade, as it necessarily drew towards that trade a greater proportion of the capital of Great Britain than what would have gone to it of its own accord; so by the expulsion of all foreign capitals it necessarily reduced the whole quantity of capital employed in that trade below what it naturally would have been in the case of a free trade. But, by lessening the competition of capitals in that branch of trade, it necessarily raised the rate of profit*88 in that branch. By lessening, too, the competition of British capitals in all other branches of trade, it necessarily raised the rate of British profit in all those other branches. Whatever may have been, at any particular period, since the establishment of the act of navigation, the state or extent of the mercantile capital of Great Britain, the monopoly of the colony trade must, during the continuance of that state, have raised the ordinary rate of British profit higher than it otherwise would have been both in that and in all the other branches of British trade. If, since the establishment of the act of navigation, the ordinary rate of British profit has fallen considerably, as it certainly has, it must have fallen still lower, had not the monopoly established by that act contributed to keep it up

But whatever raises in any country the ordinary rate of profit higher than it otherwise would be, necessarily subjects that country both to an absolute and to a relative disadvantage in every branch of trade of which she has not the monopoly.
It subjects her to an absolute disadvantage; because in such branches of trade her merchants cannot get this greater profit, without selling dearer than they otherwise would do both the goods of foreign countries which they import into their own, and the goods of their own country which they export to foreign countries. Their own country must both buy dearer and sell dearer; must both buy less and sell less; must both enjoy less and produce less, than she otherwise would do.

It subjects her to a relative disadvantage; because in such branches of trade it sets other countries which are not subject to the same absolute disadvantage either more above her or less below her than they otherwise would be. It enables them both to enjoy more and to produce more in proportion to what she enjoys and produces. It renders their superiority greater or their inferiority less than it otherwise would be. By raising the price of her produce above what it otherwise would be, it enables the merchants of other countries to undersell her in foreign markets, and thereby to justle her out of almost all those branches of trade, of which she has not the monopoly.

Our merchants frequently complain of the high wages of British labour as the cause of their manufactures being undersold in foreign markets; but they are silent about the high profits of stock. They complain of the extravagant gain of other people; but they say nothing of their own. The high profits of British stock, however, may contribute towards raising the price of British manufactures in many cases as much, and in some perhaps more, than the high wages of British labour.

It is the above analysis in Book IV that brings out the best in Adam Smith’s analytical mind (there is much more to read and enjoy from dipping into Book IV).

Unfortunately, so many quotation hunters are simply looking for support for their current prejudices that they seldom stop and read beyond the ‘famous’ lines they often quote. Eric Alterman didn't even get it from Wealth Of Nations directly; he took the quotations from a secondary source!

PS: Neither quotation makes Adam Smith a ‘liberal’, a conservative, or anything else.